A tough year with low interest rates and falling equity markets have caused end users to flood into exotic derivatives in an attempt to boost returns for lower premiums, and the landscape is not likely to change this year. "There's definitely been a trend toward more complex all-encompassing derivatives," said Louis Cucciniello, v.p. in global foreign exchange options at JPMorgan in Singapore. "The market has become much more three-dimensional. A few years ago corporates would look at hedging their fx, interest rate and equity risks separately. Now you're seeing structures with fx, interest rate, and perhaps a commodity component or an equity leg," he explained.
Derivatives players expect the growth in exotic derivatives to continue as regulators in emerging markets, including India, Korea, and Taiwan, start permitting a wider range of instruments. "We've seen a clear trend for local firms to get more active as well as both investors and corporates looking to employ derivatives further. Next year should be even more vibrant," said Bryan Yap, co-head of emerging markets Asia; fixed income and derivatives trading at Deutsche Bank in Singapore.
The market for hybrid instruments, especially those which combine interest rate and credit risk, took off across Asia as several firms including Barclays Capital Asia and Société Générale Asia offered the products for the first time (DW, 4/14). On the pure foreign exchange side, hedgers became more open to exotics such as digital options to take advantage of zero-cost plays (DW, 1/13). "Zero-cost structures have proved popular [last] year," said Claudio Piron, head of foreign exchange strategy at Standard Chartered Bank in Singapore, a trend which is likely to continue this year.
The falling equity markets also led customers to look at capital protection products. "Customers want certainty," said Luke Randell, managing director of trading and derivatives at Salomon Smith Barney Australia in Sydney. As demand for capital protected products grew, new variations hit the market. For example, SSB launched the first capital guaranteed product in Australia linked to Asian indices that allows investors to lock in quarterly gains (DW, 9/8).